SIGNIFICANCE OF EXTERNAL AUDITORS ON THE EXAMINATION OF FINANCIAL STATEMENT

Abstract

This study was to assess the significance external auditor‟s in the examination of financial statement of first Bank of Nigeria Plc., Enugu. The banking sector in Nigeria and elsewhere in recent times have become so diversified, challenging, highly competitive and has been characterized by persistent, fraud, errors and misappropriation of funds in the bank, the impact of which has undoubtedly shaken the whole economy of the nation. For this work to be effectively and efficiently carried out the use of primary and secondary methods was adopted for the collection of data, where in primary data, the researcher designed and advanced questionnaires to first Bank Enugu for collection of primary data while secondary data was gotten from textbooks, journals, manuals lecture notes, etc. the data collected from the questionnaire was analyzed in tables with simple percentage and interpreted for the understanding of the study the formulated hypothesis were tested using chi-square statistics. The result of the study shows that, external auditors examination of first banks financial statement or records aids in checking and monitoring as well as stopping frauds errors, misappropriation of funds in the Banks. Recommendations were made to the management of First Bank of Nigeria Plc, Abuja.

TABLE OF CONTENT

Title page

Approval page

Dedication

Acknowledgment

Abstract

Table of content

CHAPETR ONE

1.0   INTRODUCTION 

1.1        Background of the study

1.2        Statement of problem

1.3        Objective of the study

1.4        Research Hypotheses

1.5        Significance of the study

1.6        Scope and limitation of the study

1.7       Definition of terms

1.8       Organization of the study

CHAPETR TWO

2.0   LITERATURE REVIEW

CHAPETR THREE

3.0        Research methodology

3.1    sources of data collection

3.3        Population of the study

3.4        Sampling and sampling distribution

3.5        Validation of research instrument

3.6        Method of data analysis

CHAPTER FOUR

DATA PRESENTATION AND ANALYSIS AND INTERPRETATION

4.1 Introductions

4.2 Data analysis

CHAPTER FIVE

5.1 Introduction

5.2 Summary

5.3 Conclusion

5.4 Recommendation

Appendix

CHAPTER ONE

INTRODUCTION

• Background of the study

It is obvious that enormous resources of money and material are being utilized by corporate organizations. In recent years the numbers and monetary values of public sector activities have increased substantially. This increase in activities have brought within an added demand for accountability. Auditing is one of the elements of accountability. Shareholders and government are responsible for ensuring that appropriate audit are made and reports therefore acted upon. Financial auditing contributes to public account ability since it provide independent report or whether the financial information represent a true and fair view of the organization’s financial stand, the internal controls and the compliances with laws and regulation. Management of most banks is detached from owners (Principal-Agency Theory). Merkling(1976) in Omokhudu and Omoye (2012) define the agency relationship as a contract under which one party (the principal) engages another party(the agent) to perform some services on their behalf with the principal delegating decision making authority to the agent. As such the owners or shareholders of most banks are not part of the daily operations of the organizational activities look forward to the realization of their goals. There are however, other interest groups who depend on the organization to realize their own respective goal. The suppliers, stock brokers, lenders, government and so on are all part of the stakeholders, since these owners are not involved in the daily operations of the business, they may be doubtful of what the management may present to them as report of the organizations performance for the purpose of reliance on the management report, the stakeholders need confirmation report, the stake holders need confirmation or assurance by an independent party known as the external auditor. In the light of this, customers need the assurance of the external auditors, who are greatly depended upon, since they are expected to adopt the attitude of professional skepticism. This suggests that even though the auditors are not mainly, finding out fraud in the financial report, they should recognize the possibility of its existence. This is one of the pronouncements in ISA 240 which was further made stronger and actionable by the introduction of the Sarbanes Oxley of 2002 The Act was introduced in 2002 following the failure of Enron, scandal which was cleverly hidden from the external auditors of Anderson, leading to colossal losses by the stakeholders, all over the world. However not all the stakeholders expects from the external auditors could be legally enforceable as in the case of Re-Kingston cotton mill of 1896 in which the external auditors were adjusted as watchdog and not blood bound (Millichap, 2008). Thus, auditors are bound or liable within the limits of the statutory requirements contrary to the perception of the stakeholders. The divergence between stakeholder’s perceptions of the auditor and the statutory requirement is the expectation gap. There are so many problems which surrounded this, on the strength of this multiple problems, it is pertinent to have proper examination of the responsibilities of the external auditors to public and private companies to know the effects of non- compliance by the auditors on the corporate performance of an organization. Unarguably, stakeholders look up to the external auditors as one who has the professional competence and whose advise or opinion is held sacrosanct for investment decision. Though the duties of the auditor of the public companies are expressly stated, it is pertinent that an agreement letter which states the duties to be performed be given to auditor of banks; statutory requirement or engagement letter becomes the springboard on which the organization success or failure is viewed visa-avis the auditor’s action. More importantly is that the stakeholders especially depositors in the banks still look up to the external auditors’ reports to assure them of the safety of their deposits and answers other going concern questions on the banking industry. Because of the perception of the stakeholders on the responsibilities of external auditors in this regard, this paper seeks to review the roles of external auditing in assisting banks increase their deposits thereby enhancing value creation to stakeholders.

Financial statements (or financial reports) are formal records of the financial activities of a business, persons, or other entity. In British English, including United Kingdom Company Law, financial statements are often referred to as accounts, although the term financial statement is also used, particularly by accountants (IASB, 2007). Financial statement provides an overview of a business or person’s financial condition in both short and long term. All the relevant financial information of a business enterprise presented in a structured manner and in a form easy to understand, is called Financial Statements (Grewal, 2008). When people refer to audit quality they focus on the credibility of the audited financial statements within the reporting regime in which they have been prepared. Duff (2004) asserts that firms need to attract high quality individual with the necessary technical and interpersonal skills to improve audit quality. Lennox (1999) believes that most researchers generally agree that the size or brand name of audit firms is an appropriate indicator of audit quality. Palmrose (1988) defines audit quality in terms of level of assurance. Since the purpose of an audit is to provide assurance on financial statements, audit quality is the probability that financial statements contain no material misstatements. In academic research (e.g. Elifsen and Willekens, 2008), audit quality is often related to the competence and independence of auditors being able to detect material misstatements and being prepared to issue appropriate audit reports to reflect their findings. Geiger and Raghunandan (2002) measures audit quality as whether the auditor had issued a going-concern qualification in the prior year for US clients that declared bankruptcy. They found that auditors are less likely to issue a going concern opinion during the initial years of engagement but not in later years, contrary to the expressed concern that a long auditor-client relationship negatively affects audit quality. Other measures of audit quality have included, among others, desk reviews and SEC enforcement actions (Geiger and Rama, 2006), audit size (DeAngelo, 1981; Krishnan and Schauer, 2000), audit tenure (Ghosh and Mood, 2005), industry expertise (Wooten 2003), audit fees and economic independence (Choi et al 2010). In more formal terms, a commonly quoted definition of audit quality from DeAngelo (1981) is the ‘Market-assessed joint probability that a given auditor discovers (a) a breach in the client’s accounting system and (b) report the breach’. Neither a user of audited financial statements nor an academic researcher can tell whether a specific audit report accurately reflects the presence or absence of material misstatements. Even when misstatements that were not reported by an auditor subsequently come to light, that does not represent conclusive evidence of a failure in audit quality, since audits are not intended to provide absolute assurance. ICAEW’s 2002 Audit Quality publication explained that ‘…at its heart, [audit quality] is about delivering an appropriate professional opinion supported by the necessary evidence and objective judgments.’ One way of making the concept real is to try to establish clear expectations of what auditors need to do to support an appropriate professional opinion on an individual set of financial statements. Investment decisions are based partly on reported financial statement information. Issues related to quality of audited financial statement continue to be a major interest to accounting researchers, practitioners and policy makers. For instance, Enron scandal has led US policy makers to confront issues related to improvement in audit quality. Meanwhile, the International Federation of Accountant (IFAC) commissioned the Task Force on Rebuilding Public Confidence in Financial Reporting (Credibility Task Force) in October 2002 to look at ways of restoring the credibility of financial reporting. According to Francis et al (2005), unreliable firm-specific information in financial statement could pose a non diversifiable information risk to investors. Current reporting regimes in most countries seek to increase the reliability of financial statement information by a combination of mechanism. In the current study the researcher shall explore the various qualities that make audited financial statements acceptable in the Nigerian Money Deposit Banking industry. As harshly criticized as accounting and accountants are, such criticism is not at all new. Strident complaints about dishonest and deceptive audited financial statements are now rampant. This was harshly exposed after unforeseen distress in the financial system like that of Enron Scandal in 2002, collapse of Lehman Brother of United State of America and global financial crises of 2008. Many of those were partly, if not majorly, blamed on misleading audited financial statement published by those companies. Most recently is the case of Akintola William’s Accounting Firm and Federal Republic of Nigeria on the Probe of Nigeria National Petroleum Corporation (NNPC) of 2012. It is based on these happenings that the desire to ensure quality of audited financial statements arises. Notably, some of the problems which always exist are: Money Deposit Banks in Nigeria have published audited financial statements which posted huge returns and presented such banks to the public as sound and healthy but quite unfortunately they have been subsequently declared as ailing or failed and bankrupt; Shareholders are worried about the safety of their investments entrusted in these Money Deposit Banks in Nigeria and this has led to doubts as to whether or not to invest in the banks; Contrary to all these expectations, majority (both the investing public and the masses) today see nothing useful about auditing and the services rendered by Auditors

• STATEMENT OF THE PROBLEM

External auditing functions are seen as powerful tool that could aid corporate performance and infact existence. The sensitive nature of the banks especially in Nigeria has put more demand on external auditing reports as most depositors look up to the yearly assurance reports affirming and reaffirming the viability or otherwise of the banks. In the early 1990’s Nigeria experience the collapse of almost eighty (80%) of her first generation banks like the Cooperative and Commerce bank(CCB), African Continental Bank(ACB), Orient Bank and a host of others. Reports have it that a good number of depositors lost their deposits, other forms of investments in the banks and even lives. Again, between 2008-2009, the Central Bank of Nigeria in a bid to save the banking public floated the Asset Management Company of Nigeria (AMCON) to rescue about five banks in Nigeria which were declared weak whose assets and depositors’ funds were in the negative balance. Undoubtedly, these banks had external auditors who had conducted annual auditing on their accounts and certified the banks as being healthy. Studies have been carried out on the general role of the external auditing in areas of fraud prevention in the banking industry but few or none has been conducted on the role of external auditing on encouraging the growth of banking business in Nigeria with specific interest on deposit mobilization and hence this study

• OBJECTIVE OF THE STUDY

The following specific objectives were put forward by the researcher;

1. To examine the relationship between auditor independence in relation to the quality of financial statement examination in Nigeria
2. To determine the factors which encourages the independence of auditors on financial report in public enterprises

• To ascertain the adequacy of professional and regulatory stipulations on auditors independence in relation to quality financial reporting

1. To ascertain the effect of external auditors independence in examination of the financial statement
   • RESEARCH HYPOTHESES

The hypotheses proposed in this study are stated as follows:
H₁: There is a significant relationship between the statutory audit quality and quality of financial reporting.

H₀: There is no factor that reduces the independence of auditors.

H₀²: There is no determinant of auditor’s independence in Nigeria companies.

H₂: There is a significant relationship between professional and regulatory stipulations on auditor independence in Nigeria.

• SIGNIFICANCE OF THE STUDY

The study has the positive and potential of motivating, likewise encouraging auditors and users of financial information to see the need for auditor independence. It will enable clients appreciate the enormity of the auditor’s job and factors that can negatively affect his job and career. The outcome of the study will assist and motivate audit firm, company’s management or directors of companies and the public to further appreciate and welcome the need to comply with the relevant Statement of Accounting Standards (SAS) and the International Financial Reporting Standard (IFRS). This study hopes to provide relevant literature on auditor independence. This is cogent as the issue of auditors independence is ongoing and becoming more controversial. This study also expected to serve as input to regulators and other stakeholders of corporate financial reporting to established policies relating to financial reporting in the Nigeria context.

• SCOPE AND LIMITATION OF THE STUDY

The scope of the study covers significance of external auditors on the examination of financial statement. In the cause of the study there were some factors which limited the scope of the study which were out of the researchers control;

1. a) AVAILABILITY OF RESEARCH MATERIAL: The research material available to the researcher is insufficient, thereby limiting the study
2. b) TIME: The time frame allocated to the study does not enhance wider coverage as the researcher has to combine other academic activities and examinations with the study.
3. c) Finance: Limited Access to the required finances was a major constrain to the scope of the study, as the researcher could not travel across all the state in the federation to gather firsthand information.

1.7 OPERATIONAL DEFINITION OF TERMS

Audit: this is an official examination of business and financial records to see that they are true and correct.

Independence: the freedom to organize a business and make decisions for the business.

Constraint: a strict control over the way that you behave or allowed to behave.

Financial statement: Akakpan (2002) defines financial statement as the financial data or reports concerning an organization. Financial statement or report is a formal record of the financial activities of a business, person or other entity. It consist of statement of financial position, statement of comprehensive income, income statement, value added statement, statement of source and application of find.

Working papers: Audit working papers contain information from accounting and statistical records, personal observation, they result interview and enquires and other available sources.

PROFESSIONAL ETHICS

These are rules of conduct imposed by professional Accounting bodies on their members as a guideline on audit work.

Peer View: Taylor and Glezen (1994) define peer view as review of an audit firms systems and procedures, approaches and audit standards generally conducted by another audit firm of comparable size and reputation

1.9 ORGANIZATION OF STUDY

This research work is organized in five chapters, for easy understanding, as follows  Chapter one is concern with the introduction, which consist of the (overview, of the study), statement of problem, objectives of the study, research question, significance or the study, research methodology, definition of terms and historical background of the study. Chapter two highlight the theoretical framework on which the study its based, thus the review of related literature. Chapter three deals on the research design and methodology adopted in the study. Chapter four concentrate on the data collection and analysis and presentation of finding.  Chapter five gives summary, conclusion, and recommendations made of the study

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